China cen­tral bank cuts re­serve ra­tio to bol­ster tepid growth

The Pak Banker - - FRONT PAGE -

China's cen­tral bank stepped up ef­forts to cush­ion its eco­nomic slow­down amid plung­ing stock prices and a weak­en­ing cur­rency, cut­ting the amount of cash the na­tion's lenders must lock away.

The re­quired re­serve ra­tio will drop by 0.5 per­cent­age points ef­fec­tive March 1, the Peo­ple's Bank of China said on its web­site Mon­day. That will take the level to 17 per­cent for the big­gest banks, still one of the high­est such ra­tios in the world. The move marks a re­turn to more tra­di­tional eas­ing af­ter the cen­tral bank in­di­cated it would spur growth by guid­ing in­ter­bank mar­kets lower and in­ject­ing liq­uid­ity through open-mar­ket op­er­a­tions.

Gov­er­nor Zhou Xiaochuan high­lighted scope for fur­ther ac­tion when he spoke ahead of the Group of 20 meet­ing in Shang­hai last week. Fi­nance Min­is­ter Lou Ji­wei said at the event that China will ex­pand its fis­cal deficit to sup­port struc­tural re­forms to the econ­omy, which slowed to a 6.9 per­cent growth pace last year, the weak­est since 1990.

"Of­fi­cials are mak­ing good on their prom­ise at the G-20 to pull all pol­icy levers to sta­bi­lize growth," said Fred­eric Neu­mann, co-head of Asian eco­nomic re­search at HSBC Hold­ings Plc in Hong Kong. The re­duc­tion "sug­gests that of­fi­cials be­lieve that they have suc­ceeded in rein­ing in cap­i­tal out­flows, af­ter de­fer­ring ex­plicit mon­e­tary eas­ing in Jan­uary over wor­ries this could ac­cel­er­ate out­flows."

The Peo­ple's Bank of China has been try­ing to re­store sta­bil­ity to the na­tion's cur­rency af­ter out­flows hit a record pace in re­cent months. Re­duc­tions to the re­quired re­serve ra­tio -- which will al­low banks to lend more -- help com­pen­sate for the de­par­ture of money. The cen­tral bank said it low­ered the RRR rate to guide sta­ble and ap­pro­pri­ate growth in credit and cre­ate ap­pro­pri­ate mon­e­tary and fi­nan­cial con­di­tions for sup­ply-side struc­tural re­form, ac­cord­ing to a state­ment on its web­site. The Shang­hai Com­pos­ite In­dex has de­clined 24 per­cent this year, the worst per­former among 93 global equity in­dexes. China's stocks are poised to rally Tues­day af­ter the move, said Chen Ji­ahe, strate­gist at Cinda Se­cu­ri­ties Ltd., said.

"Blue-chip stocks may get a boost to­mor­row due to their high cor­re­la­tion to the econ­omy," Chen said.

China's cen­tral bank has pre­ferred a newer mone- tary ap­proach in re­cent months, guid­ing money mar­ket rates lower and in­ject­ing funds.

"The Peo­ple's Bank of China had sig­naled that it was mov­ing away from blunt in­stru­ments like the RRR, and to­ward more sub­tle tools to man­age liq­uid­ity and in­ter­bank rates," Bloomberg In­tel­li­gence an­a­lysts Tom Or­lik and Field­ing Chen wrote in a note. "That adds to the sur­prise fac­tor in the re­turn of the RRR."

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